It’s The 4th Quarter…

 

Your Weekly Tax Tip

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Phone: (323) 292-5407
New Baby? Tax Tips Everyone Should Know
Especially parents, grandparents and relatives
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For new parents, information is coming from every direction – feeding times, car seats, sleep schedules, strollers, child development and of course … taxes. What most new parents do not consider is that this little bundle of joy just complicated their tax situation!

Whether you are a new parent, grandparent, or know someone who is expecting, here are some tax tips to consider:

  • Initiate a 529 education savings plan. 529 education savings plans are a great way to kick off the baby’s savings for the future. These plans offer low-cost investments that grow tax-free as long as the funds are used to pay for eligible education expenses (including up to $10,000 for elementary and secondary tuition). States administer these plans, but that doesn’t mean you are stuck with the plan available in your home state. Feel free to shop around for a plan that works for you. Starting to save early, even a little bit, maximizes the amount of tax-free compound interest you can earn in the 18+ years you have before going to college.
    Bonus tip for family and friends: Anyone can contribute up to $15,000 per year to the plan for each child! In addition, there is a special provision for 529 plans that allows five years worth of gifts ($75,000) to be contributed at once — a great estate-planning strategy for grandparents.
  • Update Form W-4. Once parent(s) return to work, year-to-date withholding and current allowances on the Form W-4 need a review. Remember the birth of a child brings new tax breaks including a $2,000 Child Tax Credit and Child and Dependent Care Credit for child-care expenses. These credits can be taken advantage of now by lowering tax withholdings and increasing take-home pay to help cover diapers and other needs that come with a new baby.
  • Track medical expenses. Having a baby is expensive. According to Business Insider, the average cost to deliver a baby (without complications) is over $10,000. That doesn’t include the extra doctor visits and other medical expenses that might accumulate. There are ways to pay for medical expenses with pretax dollars or take tax deductions, but there needs to be a plan and receipts need to be saved. Many employers offer tax-advantaged accounts such as a Health Savings Account (HSA) or Flexible Spending Account (FSA). If not, an individual account might be available, depending on your insurance, or itemized deductions may be taken.

Given the tax considerations of having a new child in the family, review this information and forward this tip to anyone expecting a new addition. Bringing home a new baby is one of the great joys in life. Taking full advantage of the tax benefits that come with being a new parent make it even better. Please call if you have any questions.

Category: Deductions

Published: 12/28/2018

 

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Today Is THE Day

 

Your Weekly Tax Tip

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Phone: 323.292.5407
Last-Minute Tax Deductions
There is still time to lower your tax bill!
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There’s no time left to procrastinate! Now is the time to make last-minute tax moves to save you some money. Here are ideas to consider:

  • Sell loser stocks. Review your portfolio for stocks, mutual funds and other investments that are sitting in a loss position. If the investments are looking like they won’t be rebounding anytime soon, sell them and take advantage of the annual capital loss limit. Losses will first net against your capital gains, but the IRS will allow you to deduct up to $3,000 in excess losses against your ordinary income. Consider selling loser investments held less than one year first as they will offset short-term gains that are taxed at higher ordinary income tax rates.
  • Prepay your mortgage. As an individual taxpayer, deductions are allowed depending on when you pay them. You can take advantage of this at the end of the year. If you are planning to itemize your deductions, make your January house payment in December and get credit for the mortgage interest deduction this year. That’s 13 months of interest in one year just by making the payment a few days early.
  • Donate household items. You might have tax deductions hiding in your garage, closets or basement! Donations of household items and clothing are a great way to boost your charitable giving deduction. There are a few things to consider. The donation needs to be made to an eligible charity (called a 501(c)(3) organization). Documentation is required to substantiate your donation, so take a picture and get a receipt for all donations. All donations with a fair market value of $5,000 or more need a qualified appraisal.
  • Fund your 401(k). All contributions to a 401(k) deferral account will decrease your taxable income. So see if your employer will allow you to increase your 401(k) contributions. The contribution limit for 2018 is $18,500 or $24,500 if you are 50 or older ($19,000 or $25,000 if you are 50 or older in 2019). Even if a late contribution change is not allowed, now is a great time to set up next year’s 401(k) contributions.
  • Make a donation from your IRA. If you are older than 70½ you can make a charitable distribution of up to $100,000 directly from your IRA to a qualified charity. The distribution is excluded from taxable income, so this is a great way to donate and take advantage of the higher standard deduction. Even better, this type of distribution qualifies as a required minimum distribution.

With the increase in standard deductions, year-end moves need to be analyzed more closely than in past years.

Category: Planning

Published: 12/14/2018

Watch Out For Tax Torpedos

 

Your Weekly Tax Tip

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Phone: 323.292.5407
Beware the Tax Torpedo
Large retirement account balances can cause Social Security tax problems
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Putting off distributions and holding assets in your retirement accounts as long as possible may seem like a good idea, but waiting too long can cause a major tax problem. When you reach 70 ½, the trigger requiring minimum distributions (RMDs) from qualified retirement accounts is pulled and a potential tax torpedo is launched.

RMDs explained

RMDs apply to Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and other defined contribution plans. Amounts not distributed on a timely basis can be subject to a 50% penalty. Thankfully, the RMD rules do not apply to Roth IRAs. Required withdrawals must be completed by April 1 following the year you turn 70 ½ and Dec. 31 every year thereafter.

The RMD rules ensure the deferred tax benefit for certain retirement accounts does not go indefinitely into the future. In other words, the IRS now wants their cut by applying income taxes to your tax-deferred savings account balances. The amount you must take out each year is based upon your age, your spouse’s age and your filing status.

The tax torpedo

If you continue to wait to start taking money out of your retirement accounts, the balance in your accounts may be very high when you reach age 70 ½. These higher balances mean a higher annual taxable withdrawal amount. If your required retirement plan distribution is large enough, it may apply a higher marginal tax rate on your withdrawals, as well as trigger taxes on your Social Security. Depending on your income and filing status, up to 85 percent of your Social Security benefit could now be subject to income tax.

Some tips

Plan withdrawals. Once you hit age 59 ½ you may withdraw money from qualified tax-deferred retirement accounts without experiencing an early withdrawal penalty. To reduce future tax risk on your Social Security, manage annual disbursements from your retirement account(s) to be more tax efficient when you reach age 70½.

Starting Social Security. You may begin full Social Security Benefits after you reach your minimum retirement age. However, your benefit amount can increase if you delay your start date up until age 70. Consider this as part of your plan to manage a potential tax torpedo.

See an advisor. There are many moving parts in planning for retirement. These include Social Security Benefits, pension plans, savings, and retirement accounts. Ask for help to create the proper plan for you and your family. One element of the plan should include being tax efficient.

Category: Retirement

Published: 12/07/2018

Please Don’t Audit Me

 

Your Weekly Tax Tip

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Phone: 323.292.5407
Five Reasons Why the IRS Will Audit You
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Each year, the IRS audits over 1 million tax returns. With agency resources shrinking, the IRS is more selective when choosing tax returns to audit. Knowing what the IRS is looking for can help you understand and reduce your audit risk. Here are five of the biggest reasons the IRS may choose to audit your return:

  1. Your income is high or low. The reasoning is simple – higher earnings may lead to bigger errors and lower earnings may mean incorrect deductions. The adjusted gross income (AGI) range with the least audit risk is $25,000 – $200,000. As your income moves toward the extremes in either direction, the chance of audit increases.
    IRS Audit Odds
  2. You fail to report all your income. The IRS Automated Underreporter Program matches W-2 and 1099 information with the information you report on your tax return. When a mismatch occurs, expect to receive an automated CP2000 notice from the IRS notifying you of the additional amount due.
  3. You own a business. Rules regarding business deductions are confusing and constantly changing. The IRS knows this. Incorrectly deducting personal expenses or having your business classified as a hobby, thereby eliminating deductions, can get you in trouble with the IRS. Cash heavy businesses are under increased scrutiny due to higher fraud rates. Solid tracking processes and good records are necessities for income and expense substantiation.
  4. You make a math error. The IRS identified over 2.5 million math errors on 2016 returns. The biggest culprits are tax and credit calculations. Math errors can create a two-fold problem for you – additional tax owed and more scrutiny applied to other parts of your tax return.
  5. You claim the Earned Income Tax Credit. According to a report by the U.S. Treasury Department, 24 percent or $16.8 billion in EITC payments were issued improperly in Fiscal Year 2016. Numbers that large are sure to get the IRS’s attention. Eligibility confusion and calculation errors are mostly to blame.

While some of the risk factors are out of your control, many can be minimized. If you are chosen for an audit, don’t deal with the IRS alone – please call for help.

Category: The Audit

Published: 11/30/2018

 

CHANGING TIMES, CHANGING TAXES

 

Your Weekly Tax Tip

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Phone: 323.292.5407
IRS Releases Key 2019 Tax Information
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The IRS recently announced key tax figures for 2019, using information based on the Consumer Price Index published by the Department of Labor. Use these early figures to start developing your tax strategies for next year.

Tax Brackets: There are currently seven tax brackets ranging from 0 percent to 37 percent. Each of the income brackets increases between 1.8 and 2 percent.

Standard Deductions:

2019 Standard Deductions

Other Key figures:

2019 Other Key Figures

Caution: Remember, these early IRS figures are prior to any potential tax law changes currently under consideration in Washington D.C.

Category: What’s New

Published: 11/16/2018

Want A Bigger Nest Egg?

 

Your Weekly Tax Tip

www.taxdoc4u.com
Phone: 323.292.5407
Tips to Fund your Retirement Account
New 2019 contribution limits create retirement saving opportunity
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For the first time in six years, limits for IRAs are rising. 401(k) accounts and IRAs will see an increase of $500 in contribution maximums for 2019. Check out the table below for the details:

IRA 2019 Contribution Limits table

How can you take advantage?

Contributing the full amount allowable to a retirement plan will maximize your tax savings and increase your compound interest earnings potential. Need help making these contributions a reality? Here are some ideas:

  • Contribute your raise or bonus. A great time to contribute to a retirement plan is when you receive a raise or bonus. It allows you to take some or all of the additional income and invest in your future without changing your current lifestyle. Your investment will go even further if your employer offers a plan that matches your contribution.
  • Cut your spending. Start by reviewing your ongoing expenses and creating a budget. Maybe you have a subscription you can cancel or a service provider you can contact to negotiate a lower rate. Then look for ways to reduce your spending on day-to-day expenses – like food, for example. Some ideas to lower food costs are bringing lunch to work, skipping the coffee shop, limiting dinner out at restaurants and shopping at less expensive grocery stores. Use this money to fund your account.
  • Add a side job. At some point, there are only so many expenses you can cut. Picking up some side income might be the way to go. Whether it’s a part-time retail job or starting your own small business, the additional income might be enough to get you to your savings goal. ​
  • Automate your contributions. Most plans offer a way to contribute automatically. If you have a plan through work, check to see if it has an auto-escalation feature that increases contributions over time. If you are investing in an individual plan, set up auto contributions to pull from your bank account on a monthly basis.

Working through these ideas now gives you a great chance to take advantage of the benefits of funding new or existing retirement accounts. Why not take full advantage of the tax benefits they provide? Please call if you have any questions.

Category: Retirement

Published: 11/09/2018

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Guess Who is Getting a Raise?

 

Your Weekly Tax Tip

www.taxdoc4u.com
Phone: 323.292.5407
2019 Social Security Changes Announced
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The Social Security Administration announced a 2.8 percent boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2019. The increase is the largest in seven years, and is based on the rise in the Consumer Price Index over the past 12 months ending in September 2018.

For those still contributing to Social Security through wages, the potential maximum income subject to Social Security tax increases 3.5 percent this year, to $132,900. A recap of the key amounts is outlined here:

2019 Key Social Security Benefits

2019 Social Security Benefits

What does it mean for you?

  • Up to $132,900 in wages will be subject to Social Security taxes, up $4,500 from 2018. This amounts to $8,239.80 in maximum annual employee Social Security payments. Any excess amounts paid due to having multiple employers can be returned to you via a credit on your tax return.
  • For all retired workers receiving Social Security retirement benefits the estimated average monthly benefit will be $1,461 per month in 2019 – an average increase of $39 per month.
  • SSI is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married).
  • A full-time student who is blind or disabled can still receive SSI benefits as long as earned income does not exceed the monthly and annual student exclusion amounts listed above.

Social Security & Medicare Rates

The Social Security and Medicare tax rates do not change from 2018 to 2019.

2019 Social Security and Medicare Rates

Note: The above tax rates are a combination of 6.20 percent Social Security and 1.45 percent for Medicare. There is also 0.9 percent Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please note that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.

Category: Retirement

Published: 11/02/2018

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